Financial trading is a world that remains a mystery for the average person. Stocks are traded in a frenzy every day, and decisions made have a wide-ranging impact on us all. The majority of us will never be able to understand the financial complexities involved in trading stocks fully. Still, the growth of social media has given us a better understanding of human emotions that drive stock trades.
News from the outside world can cause traders to rush into or out of certain stocks. Positive feedback occurs when activity leads to more action, and stores are traded more often than normal. Recent studies have shown that social events can generate an increase in Twitter activity. Our study has shown that the levels of activity in both cases are statistically similar.
The stock market’s and Twitter’s activity levels are usually intermittent. Both worlds experience long periods of low activity, followed by very high bursts. Twitter is a daily rumble, but occasionally, an event occurs that encourages people to tweet. This is a form of horde behavior that reflects the strong tendency to align human behavior.
It is no longer the case that our most influential decision-makers are located in our local community. Twittering is a global phenomenon, and social networks provide a virtual community where people with different interests can share them. This new method of information dissemination is open to all. It is a huge difference from the old world order.
A simple way to analyze the activity of Twitter users is to look at the frequency with which certain words appear. The words chosen may have a broad appeal. The analysis looked at how often about 100 international brands, such as Apple or IBM, appeared in tweets. The occurrence rates of each brand name in tweets are characterized by steady days followed by peaks of activity.
Three international brands’ tweeting rates over time. All brands show long periods of constant activity, followed by spikes in activity.
Twitter will be full of tweets from people who have tried a product that a company has launched. The tweets encourage other people to share their experience of the product. It creates an awareness about the product that is now quantifiable. An analysis of Twitter activity shows that the increased levels of action after a product launch have a typical duration of 24 hours. After this, it disappears. Both social media and financial markets are affected by this persistence or memory effect. This is due to the statistically similar behavior of activity levels in the two contexts.
The same power-law distribution applies to both Twitter activity and the trading volume of a financial instrument. The levels or volumes can fluctuate in a wide range of values, spanning multiple orders of magnitude. The fluctuations in activity can be extremely large and involve a large number of users or traders.
In nature, we can observe the same type of statistical distribution in a variety of phenomena. For example, on the road, a small variation in car density can cause a large fluctuation in traffic flow. A simple stochastic model can describe the common statistical properties of tweeting levels and trading volume in financial securities. Other people start to relate to something when people start to suddenly become interested in it (such as a security or product). It is a fact that someone already has a connection to something. This activates others.
Indeed, a simple model of point processes cannot capture all the subtleties, but this may still reveal something about human behavior. The-making methods of Twitter and market participants may be quite similar.
Twcan make it seem as if the importance of a product is exaggerated. Consider the iPad announcement made this week. The product was the focus of thousands upon thousands of users eager to reply. In contrast, others spotted that it had become “the topic to be talked about” and contributed their opinions. It has been happening in the trade world for many years, but it’s always been a somewhat closed environment. Social media is a world that’s open to all, and we can gain new insights into human traits. This gives us a better understanding of the financial markets, which have impacted our lives so profoundly.